Tax Law Update

 

There’s great news for equipment purchasers. Recently enacted economic stimulus legislation will help reduce your tax liability for this year and improve your cash flow.

WRITE-OFF 50% of the total cost immediately!


In May 2003, President Bush signed the Jobs & Growth Act into law. The law expands the depreciation bonus enacted in 2002 and allows buyers of new equipment to depreciate (i.e., “write off”) an extra 50 percent of the cost of the equipment for the tax year in which it’s placed in service. The 2003 stimulus law also increased Section 179 business expensing levels.

How does the depreciation bonus work?
Let’s say you purchase a new piece of equipment that costs $12,000. Under the depreciation rules that existed before March 2002, you could write off 20 percent (i.e., $2,400) of the cost of the equipment for the year in which you purchased it. Now, thanks to the 2003 Jobs & Growth Act you can write off 50 percent (i.e., $6,000) immediately and you can also write off the 20 percent of the remaining 50 percent (i.e., $1,200) of undepreciated value that you were entitled to deduct under pre-2003 rules. For a $12,000 machine with a six-year depreciation life that means you can depreciate $7,200 in the first year, for a tax savings of $4,800!

When do I have to buy my new equipment to take advantage of the depreciation bonus?
To qualify for the 50 percent depreciation bonus, the equipment must be put in service after May 5, 2003 and before January 1, 2005. Property put in service between September 10, 2001 and May 5, 2003 still qualifies for the 30 percent depreciation bonus enacted in 2002.

What’s the difference between the depreciation bonus and the investment tax credit?
The depreciation bonus allows you to deduct more from your gross income and thereby reduces your tax liability by reducing your taxable income. A tax credit, on the other hand, is a direct credit against taxes owed.

Will the depreciation bonus reduce my overall tax liability?
The depreciation bonus means that you can write off more of the cost of  equipment up front, but it doesn’t increase the overall amount you can depreciate. That means you’ll still ultimately pay the same amount in taxes (your tax liability in later years will be slightly increased over what it would have been to make up for your near-term tax savings.) The advantage of the new law is that your tax liability for the purchase year will be reduced and your cash flow will be improved. Ask yourself this: Would you rather have the tax savings in your pocket to invest now or let the Federal government hold onto the money for you?

Do I have to take advantage of the depreciation bonus?
No. Although many equipment purchasers will want to use the depreciation bonus to improve their near-term cash flow, the law allows you to opt-out and depreciate your equipment according to traditional depreciation rules.

Please note that the information in this publication is provided by Rehab World as a courtesy to the public. It should not be construed as tax advice or as a promise of potential tax savings or reduced tax liability.

This should not be construed as tax advice. For more information about the depreciation bonus visit www.depreciationbonus.org, contact your tax professional, or visit the Internal Revenue Service website at www.irs.gov.